Collins Foods buys 44 KFC restaurants

Fast food retailer expands into Western Australia and the Northern Territory

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Collins Foods (ASX: CKF) has announced that it is acquiring Competitive Foods, the franchisee of 44 KFC restaurants in Western Australia and the Northern Territory.

Collins Foods already operates 125 KFC fast food outlets, mainly in Queensland with a couple in NSW, as well as 27 Sizzler restaurants across Queensland, NSW and WA. Competitive Foods operates 40 KFC outlets in WA and 4 in the Northern Territory.

The acquisition will give Collins a total of 169 KFC stores as well as expand its coverage into new states, giving the company new store rollout and organic growth opportunities. The company says the acquisition, costing $55.6 million, will be immediately earnings accretive, suggesting a 15% uplift in earnings per share.

The acquisition will be funded entirely through debt, taking Collins Foods' net debt to around $137 million. The company has also taken a 50% stake in Snag Stand, a retailer of gourmet hot dogs and sausages, with five stores across Australia's eastern states.

The announcement comes as Collins Foods reported a 17% fall in net profit to $6.2 million for the six months to October 13, compared to the previous period. That does include an impairment charge of $1.2 million after tax, with underlying net profit up slightly over last year. Once again, Sizzler sales revenues have declined, this time by a hefty 9.1%, and Collins Foods may be fighting a losing battle trying to keep the 27 stores alive.

KFC same store sales growth was up 1.3%, fairly dismal when you consider competitor Domino's Pizza (ASX: DMP) generated growth in same store sales of 5.2% in the three months to September 30. The issue for Collins Foods is that it needs to revamp its KFC menus to compete with established retailers such as Red Rooster, Oporto's and Nando's , as well as an influx of new fast food outlets including Guzman & Gomez, Grill'd Burgers and Crust Pizza – owned by Retail Food Group (ASX: RFG).

Foolish takeaway

While the move to expand into new geographies appears wise, investors may be concerned about Collins Foods' debt levels post-acquisition. If the company can generate enough free cash flow to pay down its debt and lose the Sizzler anchor round its neck, Collins Foods may be worthy of a closer look.

Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

More on ⏸️ Investing

A white and black robot in the form of a human being stands in front of a green graphic holding a laptop and discussing robotics and automation ASX shares
Technology Shares

Joining the revolution: How I'd invest in ASX AI shares right now

Advances in artificial intelligence (AI) could usher in a new industrial revolution. Here’s how you can invest in it.

Read more »

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »